Before you accept one or more of those preapproved credit card offers you find in your mailbox, make sure you understand the distinction between the different types of credit cards and the terms and conditions that will affect your costs. There are several types of plastic cards that are loosely referred to as credit cards, but they don't all work alike.

Major credit cards include Visa, MasterCard, Discover, and Optima. These card companies allow you to make purchases up to a preset credit limit ranging from $500 to $10,000 or more, depending on your income and credit history. You can pay the balance in full each month, the minimum required by the card company (typically around 2 percent of the balance), or any amount in between.

Travel and entertainment cards, including American Express, Diners Club, and Carte Blanche, require you to pay the entire balance due each month. They have no preset credit limits but if you are late with your payment, you may be charged interest or have the use of your card blocked until you catch up.

House cards allow you to charge purchases at a particular chain of retailers, such as department stores and gas stations, and make monthly payments, including interest charges. These cards are becoming less popular, since many retailers allow you to use your major credit card. It's easier to use one major credit card, and make one payment a month, and it helps you keep a handle on just how much you owe in credit card debt.

Smart cards, the latest in plastic cards, look like credit cards but contain a computer chip with a preset dollar amount built in. Instead of charging to the card, you spend the value at places that accept smart cards, or chip cards.

The Cost of Credit

There are several types of costs associated with credit cards. The annual fee is a flat dollar amount the issuer charges each year for the use of the card. Many, but not all, issuers charge annual fees, so look for no-fee credit cards (but be sure to consider all the other factors such as grace period, interest rate, and so on).

Finance charges are calculated based on the interest rate your card issuer charges and are the main cost of using credit. These rates vary significantly from one card to another, so you can save a lot of money by shopping around for a card with a lower interest rate.

Other fees that you might incur on your credit card include application fees, processing fees, charges for exceeding your credit limit, late-payment fees, balance-transfer fees, credit life insurance, and fees on cash advances.

Grace Periods

The grace period, commonly twenty-five days, is the time between the date you're billed and the date your payment is due. If you pay your entire balance within the grace period, you may not incur any interest charges. If you carry a balance, there's often no grace period on new purchases, so interest starts accruing from the date of purchase. Some issuers charge interest from the day you make the purchase, even if you pay your balance in full, so in effect there is no grace period.